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Venture Deals : Be Smarter Than Your Lawyer and Venture Capitalist

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Help take your startup to the next step with the new and revised edition of the popular book on the VC deal process--from the co-founders of the Foundry Group

How do venture capital deals come together? This is one of the most frequent questions asked by each generation of new entrepreneurs. Surprisingly, there is little reliable information on the subject. No one understands this better than Brad Feld and Jason Mendelson. The founders and driving force behind the Foundry Group--a venture capital firm focused on investing in early-stage information technology companies--Brad and Jason have been involved in hundreds of venture capital financings. Their investments range from small startups to large Series A venture financing rounds. The new edition of Venture Deals continues to show fledgling entrepreneurs the inner-workings of the VC process, from the venture capital term sheet and effective negotiating strategies to the initial seed and the later stages of development.

Fully updated to reflect the intricacies of startups and entrepreneurship in today's dynamic economic environment, this new edition includes revisions and updates to coverage on negotiating, gender issues, ICO's, and economic terms. New chapters examine legal and procedural considerations relevant to fundraising, bank debt, equity and convertible debt, how to hire an investment banker to sell a company, and more.



Provides valuable, real-world insights into venture capital structure and strategy
Explains and clarifies the VC term sheet and other misunderstood aspects of capital funding
Helps to build collaborative and supportive relationships between entrepreneurs and investors
Draws from the author's years of practical experience in the VC arena
Includes extensively revised and updated content throughout to increase readability and currency

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist is a must-have resource for Any aspiring entrepreneur, venture capitalist, or lawyer involved in VC deals as well as students and instructors in related areas of study.
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Product details

  • Hardback | 368 pages
  • 160 x 236 x 29mm | 582g
  • New York, United States
  • English
  • 4th Edition
  • 1119594820
  • 9781119594826
  • 14,410

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There has never been a better time for entrepreneurs to create a startup. With decreasing costs of getting started and operating a business, the ability to be a founder has become increasingly democratized across the globe. On top of this, the amount of funding sources has dramatically increased not only in number, but also in types, as non-traditional sources like crowdfunding and accelerators have become important players in the ecosystem. Today, an entrepreneur raising money has a lot more options than even just a few years ago. The question becomes "how does one evaluate these opportunities and maximize the result?"

Brad Feld and Jason Mendelson are back with version four of their Wall Street Journal and Amazon bestseller. Packed with the latest insights and emerging trends, the authors' fifty-plus years of collective experience are at your fingertips. Whether you need advice on raising money, negotiating a term sheet, selling your business, or really just want to have insider access into what makes venture capitalists tick, this book is for you.

Brad and Jason discuss different stages of financings, the many types of different investors who might fund your company, as well as the different avenues of funding, whether they be equity, traditional convertible debt, venture bank debt, or one of the newer practices of crowdfunding and pre-sales.

Whether you are a new or seasoned entrepreneur, lawyer, venture capitalist, educator, or student of the industry, Venture Deals, Fourth Edition is the go-to-guide to navigating the venture landscape.

For additional information, including term sheets and all the documents generated from the term sheet as part of venture financing, visit the authors' website at venturedeals.com.
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Back cover copy

Praise For venture deals

"Every venture capitalist believes they know how to do venture deals. Jason and Brad, however, actually have deep knowledge and insight and are willing to share the details of how to get deals done right. While this book may not actually make you smarter than your lawyer (assuming you have a good one), it is an essential read for entrepreneurs, lawyers, and venture capitalists who want to be successful in a critical part of building a great company: raising money." --Eric Jensen, Partner, Cooley LLP

"One of the greatest lessons for entrepreneurs is to learn from others and take advice from trusted partners and experts. In Venture Deals, Jason and Brad offer entrepreneurs the gift of their experience and expertise over many years and hundreds of deals. Take it and run with it. What you will learn in this book will serve you well in every investment, legal, and banking conversation throughout your life as an entrepreneur. Your ideas and your passion will get you far, and having an insider's understanding of how to fund your ambitious goals will get you there that much faster." --Greg Becker, CEO, Silicon Valley Bank

"Having worked with Brad and Jason during the Internet bubble, I witnessed first-hand the experience they gained by doing deals that covered the entire range of issues an entrepreneur faces today. This is a must-read for both entrepreneurs and investors as it lets each side understand the terminology, structures, and potential issues inherent in venture deals so they can focus on what really matters, regardless of which side they are on. Every entrepreneur who is raising or considering raising venture capital should read this book!" --Heidi Roizen, Partner, DFJ

"Feld and Mendelson pack a graduate-level course into this energetic and accessible book. The authors' frank style and incisive insight make this a required read for high-growth company entrepreneurs, early stage investors, and graduate students. Start here if you want to understand venture capital deal structure and strategies." --Brad Bernthal, CU Boulder, Associate Professor of Law, Technology Policy, Entrepreneurial Law

"I've been lucky to have Brad and Jason as mentors on my journey from entrepreneur, to running Techstars Boston, to serving as the first investor to over 100 startups, and now as CEO of The Engine Fund. I give this book to all founders I back. Venture Deals is a fundamental resource for both entrepreneurs and venture capitalists." --Katie Rae, CEO and Managing Partner, The Engine
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Table of contents

Foreword by Fred Wilson (3rd Edition) xi


Foreword by James Park (3rd Edition) xiii


Foreword by Dick Costolo (1st and 2nd Editions) xv


Preface xvii


Acknowledgments xxiii


Introduction: The Art of the Term Sheet 1


Chapter 1 The Players 3


The Entrepreneur 3


The Venture Capitalist 4


Financing Round Nomenclature 7


Types of Venture Capital Firms 9


The Angel Investor 10


The Syndicate 12


The Lawyer 13


The Accountant 14


The Banker 15


The Mentor 15


Chapter 2 Preparing for Fundraising 17


Choosing the Right Lawyer 17


Proactive versus Reactive 18


Intellectual Property 20


Chapter 3 How to Raise Money 23


"Do. Or Do Not. There is No Try." 23


Determine How Much You are Raising 24


Fundraising Materials 26


Due Diligence Materials 32


Finding the Right VC 33


Finding a Lead VC 34


How VCs Decide to Invest 35


Using Multiple VCs to Create Competition 38


Closing the Deal 39


Chapter 4 Overview of the Term Sheet 41


The Key Concepts: Economics and Control 42


Chapter 5 Economic Terms of the Term Sheet 45


Valuation and Price 45


Employee Option Pool 47


Warrants 50


How Valuation is Determined 52


Liquidation Preference 54


Pay-to-Play 63


Vesting 66


Exercise Period 70


Antidilution 71


Chapter 6 Control Terms of the Term Sheet 77


Board of Directors 77


Protective Provisions 81


Drag-Along Agreement 85


Conversion 88


Chapter 7 Other Terms of the Term Sheet 91


Dividends 91


Redemption Rights 93


Conditions Precedent to Financing 95


Information Rights 97


Registration Rights 98


Right of First Refusal 100


Voting Rights 102


Restriction on Sales 102


Proprietary Information and Inventions Agreement 103


Co-Sale Agreement 104


Founders' Activities 105


Initial Public Offering Shares Purchase 106


No-Shop Agreement 107


Indemnification 110


Assignment 110


Chapter 8 Convertible Debt 113


Arguments for and Against Convertible Debt 114


The Discount 116


Valuation Caps 117


Interest Rate 119


Conversion Mechanics 119


Conversion in a Sale of the Company 121


Warrants 122


Other Terms 125


Early Stage versus Late Stage Dynamics 125


Can Convertible Debt Be Dangerous? 126


An Alternative to Convertible Debt 127


Chapter 9 The Capitalization Table 129


Price per Share with Convertible Notes 131


Pre-Money Method 132


Percentage-Ownership Method 133


Dollars-Invested Method 133


Chapter 10 Crowdfunding 137


Product Crowdfunding 137


Equity Crowdfunding 139


How Equity Crowdfunding Differs 141


Token Crowdfunding 143


Chapter 11 Venture Debt 145


The Role of Debt versus Equity 145


The Players 147


How Lenders Think about Loan Types 148


Economic Terms 151


Amortization Terms 154


Control Terms 157


Negotiation Tactics 161


Restructuring the Deal 163


Chapter 12 How Venture Capital Funds Work 167


Overview of a Typical Structure 168


How Firms Raise Money 169


How Venture Capitalists Make Money 171


How Time Impacts Fund Activity 175


Reserves 177


Cash Flow 179


Cross-Fund Investing 179


Departing Partners 181


Corporate Venture Capital 181


Strategic Investors 183


Fiduciary Duties 184


Implications for the Entrepreneur 185


Chapter 13 Negotiation Tactics 187


What Really Matters? 187


Preparing for the Negotiation 188


A Brief Introduction to Game Theory 191


Negotiating in the Game of Financings 193


Negotiating Other Games 194


Negotiating Styles and Approaches 195


Collaborative Negotiation versus Walk-Away Threats 199


Building Leverage and Getting to Yes 200


Things Not to Do 203


Great Lawyers versus Bad Lawyers versus No Lawyers 205


Can You Make a Bad Deal Better? 206


Chapter 14 Raising Money the Right Way 209


Don't Be a Machine 209


Don't Ask for a Nondisclosure Agreement 210


Don't Email Carpet-Bomb VCs 210


No Often Means No 211


Don't Ask for a Referral If You Get a No 211


Don't Be a Solo Founder 212


Don't Overemphasize Patents 213


Don't Be Silent If You Witness Bad Behavior 213


Chapter 15 Issues at Different Financing Stages 215


Seed Deals 215


Early Stage 216


Mid and Late Stages 217


Chapter 16 Letters of Intent: The Other Term Sheet 221


Structure of a Deal 222


Asset Deal versus Stock Deal 225


Form of Consideration 227


Assumption of Stock Options 228


Representations, Warranties, and Indemnification 232


Escrow 233


Confidentiality/Nondisclosure Agreement 235


Employee Matters 236


Conditions to Close 237


The No-Shop Clause 238


Fees, Fees, and More Fees 239


Registration Rights 240


Shareholder Representatives 241


Chapter 17 How to Engage an Investment Banker 243


Why Hire an Investment Banker? 243


How to Choose an M&A Adviser 245


Negotiating the Engagement Letter 247


Helping Your Banker Maximize the Outcome 251


Chapter 18 Why Do Term Sheets Even Exist? 253


Constraining Behavior and the Alignment of Incentives 254


Transaction Costs 255


Agency Costs and Information Asymmetry 256


Reputation Constraints 257


Chapter 19 Legal Things Every Entrepreneur Should Know 259


Intellectual Property 259


Patents 261


Trademarks 262


Employment Issues 263


Type of Corporate Structure 264


Accredited Investors 265


Section 409A Valuations 266


(83)b Elections 267


Founders' Stock 268


Consultants versus Employees 269


Compensating Service Providers 270


Authors' Note 273


Appendix A: Sample Term Sheet 275


Appendix B: Foundry Group Term Sheet 285


Appendix C: Sample Letter of Intent 295


Appendix D: Additional Resources 303


Glossary 307


About the Authors 321


Index 323


Excerpt from Startup Communities 333
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About Brad Feld

BRAD FELD has been an early stage investor and entrepreneur for over thirty years. Prior to cofounding Foundry Group, he cofounded Mobius Venture Capital and Intensity Ventures. He is also a cofounder of Techstars.

JASON MENDELSON has over twenty years experience in the venture capital and technology industries in a multitude of investing, legal, and operational roles. Prior to cofounding Foundry Group, Jason was a Managing Director and General Counsel for Mobius Venture Capital. He is also a cofounder of SRS/Acquiom.
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